These 4 Measures Indicate That Xiamen Intretech (SZSE:002925) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Xiamen Intretech Inc. (SZSE:002925) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Xiamen Intretech

What Is Xiamen Intretech's Debt?

As you can see below, Xiamen Intretech had CN¥835.2m of debt at September 2024, down from CN¥886.1m a year prior. However, it does have CN¥1.42b in cash offsetting this, leading to net cash of CN¥584.4m.

How Healthy Is Xiamen Intretech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xiamen Intretech had liabilities of CN¥1.75b due within 12 months and liabilities of CN¥235.3m due beyond that. Offsetting this, it had CN¥1.42b in cash and CN¥1.23b in receivables that were due within 12 months. So it can boast CN¥661.1m more liquid assets than total liabilities.

This surplus suggests that Xiamen Intretech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xiamen Intretech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Xiamen Intretech's saving grace is its low debt levels, because its EBIT has tanked 38% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Xiamen Intretech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Xiamen Intretech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Xiamen Intretech generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xiamen Intretech has net cash of CN¥584.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥60m, being 84% of its EBIT. So we don't have any problem with Xiamen Intretech's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Xiamen Intretech (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.